Surge in Foreign Investment in the US
White House data reveals a $5-7 trillion surge in investment in US business under President Trump’s administration. This capital influx is fueled by international businesses launching new ventures or reinforcing their existing presence in the US market.
Among those investors are powerhouses like Hyundai, NVIDIA, and Taiwan Semiconductor Manufacturing Company; however, a wave of small and mid-sized companies is also moving into the US market with ambitious expansion plans.
Regardless of business size, identifying the optimal tax structure for US operations is critical when planning expansion. What is the most advantageous structure for maximizing returns while minimizing tax exposure?
Common Sense?
Smaller enterprises may seek advice from US accountants serving similarly sized domestic companies, potentially resulting in suboptimal tax structures. How so?
The most common structure recommended for domestic growth-stage companies is an LLC, which is taxed as a flow-through entity, due to its tax efficiency for privately or closely held businesses. Although this structure is often also recommended for foreign companies investing in the United States, ownership by a foreign entity introduces additional considerations that must be carefully evaluated.
Flow-Through vs. Corporation
Understanding the fundamental differences between business structures is crucial for foreign investors.
- Partnerships or flow-through entities report income, but partners pay the taxes.
- Corporations face entity-level tax plus shareholder-level tax upon distribution of profits.
LLCs are treated as partnerships and are required to report income but don’t pay taxes on that income — rather, the tax liability sits with the individual partners. A benefit here is that there is no second level of tax. Partners in a flow-through entity must file personal returns with the IRS and pay the taxes on this income.
Corporations, conversely, first pay federal income tax on all profits at the corporate tax rate. Then, when the after-tax profits are distributed to shareholders as dividends, these same earnings face a second round of taxation at the individual shareholder level.
This dual layer of taxation, or “double taxation,” creates a higher cumulative tax burden than flow-through entities — but provides a cleaner separation between business and personal finances, something that many foreign investors find advantageous for compliance, simplicity, and privacy preservation.
Considerations for Foreign Investors
C Corporations often present several advantages for foreign investors. C Corporations allow foreign investors to better match when income is taxed in the US with when it’s taxed in their home country. This timing alignment helps investors maximize the tax credits they can claim in their home country for taxes already paid in the US, potentially reducing their overall global tax burden.
Additionally, tax treaties between countries frequently provide more favorable rates on dividend income from corporations compared to business income from flow-through entities.
Furthermore, with a corporate structure in place, foreigners would not have to file individual income tax returns in the US. For many foreigners this is a big consideration as they prefer to avoid having to file individual income tax returns in the US.
Finally, many countries view the US LLC as a corporation regardless of how it is treated in the US. This discrepancy between how the US classifies the entity and how foreign tax authorities view the entity can result in unfavorable tax consequences for the partner/investor.
Can a foreigner still use an LLC?
While many investors want to avoid the negative tax impact of being members in an LLC they are still attracted to the legal and governnce flexibility of one. A compromise does exist. Foreign investors can establish an LLC entity for legal purposes, but elect to have it treated as a C Corporation for US income tax purposes, thereby achieving the best of both options.
Additional Factors to Consider
Beyond entity structure decisions, foreign investors must also consider Transfer Pricing and State and Local Tax (SALT) implications. Watch for our upcoming articles that will offer guidance on these critical aspects of inbound investment planning.
Ultimately, the optimal entity choice depends on specific business circumstances and goals. Consulting with specialists in both domestic and international tax planning is essential for proper entity structuring.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
